Aug 9, 2008

Business - 3G in India

Following the guidelines for 3G issued by the department of telecommunications (DoT) on August 1, consumers can expect a new breed of services in the coming months. 3G services will make it faster and easier to access internet, download music or videos, mobile TV among other things. Although two years overdue, the guidelines are a good indicator of how far India has moved towards creating a coherent regulatory environment and the considerable distance still left.

The guidelines spell out how the government will allocate and price 3G spectrum or, more accurately, the radio frequencies required for such communication. Now, a company will have to procure 3G spectrum in an open auction. Unlike the case for 2G — where companies receive fixed amount of spectrum with the licence — 3G spectrum will need to be paid for explicitly. All 2G licensees — whether or not they have started operations — can bid. Prospective new entrants without 2G licences can also bid, provided they have 3G experience and pay an additional 2G entry fee of Rs 1,651 crore(US $400 million) for a nation-wide licence.

The guidelines explicitly separate entry fees for 3G licence from the amount bid in the spectrum auction. While we will return to the indefensibly huge amount proposed for entry fees, the conceptual separation between the two fees meets an important demand from experts for a change in India’s current rules, which include the price for spectrum in the licence fee. This has created several well-known distortions that prevent efficient use of a strategic scarce resource.

This will be the first time the price of spectrum is sought to be explicitly discovered through an auction. While the DoT bureaucrats have failed to say this unambiguously and some future mischief cannot be ruled out, it would be difficult to argue again that the price of spectrum allocated for commercial use can be determined administratively without a market-based process. Especially, since Trai too has recommended auction for all spectrum other than that for 2G operations. Current rules, where acquiring a set number of subscribers automatically entitles a licensed operator to additional spectrum, have drawn much deserved criticism for encouraging inefficiency. Acknowledging explicitly that the price of spectrum should be discovered in the market makes the current practice, which is economically indefensible, untenable. This is a plus.

But, the guidelines are also problematic. For a start, the claim that they promote competition is bogus. In a business where extensive infrastructure, large customer base, better market intelligence, etc., give incumbents massive advantages, it is absurd that new entrants will have to pay a whopping $400 million in addition to the bids for spectrum, expected to be in billions of dollars. New players need 3G experience to apply, not 2G players. This, when most regulators facilitate new entry by imposing additional restrictions on incumbents to prevent market abuse. New comers rarely pay any fees and are seldom regulated at all. To levy a large entry fee is then not to facilitate competition but to thwart it.

Indeed, the practice in most mature regulatory regimes — the European Union, US, Canada and Australia, for instance — is to have no licence (entry) fees at all. A prospective entrant to the market, typically, requires little beyond a virtually free ‘authorization’. It must, however, pay for spectrum at market prices.

The nine companies — largely telecom novices — who are currently trying to sell at a premium the over 100 telecom licences they recently got at bargain prices will surely welcome the ’tax’ on new players. As newspapers confirmed, 3G guidelines have driven up the value of these licences, more so since they now have some spectrum. This will be far more attractive to the new 3G players who will still need a 2G licence even if they win in the spectrum auctions than spending $400 million for licence that is veritably a piece of paper with few rights. So, high entry fees mean that private speculators, not the exchequer, get the money.

Moreover, recent norms for mergers and acquisition of telecom licences made it easier for new players to acquire existing players and difficult for existing ones to merge. So, the new players will need to pay up before they bid for 3G and seek a UASL (Unified Access Licence Seekers) licence when mergers would be almost impossible. So, both cost and regulation are pitted squarely against new players.

The DoT has resurrected the old ghost of subscriber-base linked allocation of spectrum by proposing that for spectrum for CDMA services in 800 MHz band “the seniority for allotment shall be the subscriber base in telecom service area.” It says elsewhere that in case of a tie between two existing players, “preference will be given to the bidder with the larger subscriber base”. The guidelines have no explanation why, when it has been decided to conduct an auction, the final winner in each such a case should simply not be the company that bids the highest. This has dented the credibility of the government’s landmark decision to price spectrum along global best practices.

The provision to disallow companies from lowering their bids in subsequent rounds of auctions and to insist that the highest bids in the first auction will become reserve price for subsequent auctions, is equally questionable and will prevent a genuine correction if speculators play havoc in the early phases. The priority for government should be to discover a fair market price of spectrum and not to artificially raise its pickings. It has a duty to deter speculators in a strategic sector and create conditions conducive for serious players willing to compete fairly.

The bureaucratic flaws in the guidelines notwithstanding, at least some of the existing 2G players seem poised to offer 3G services in the near future. The proposed auction of 3G spectrum will deter — if not prevent — bureaucrats’ current practice of giving away valuable spectrum at arbitrary prices. But, to expect them to embrace time honoured regulatory principles and forgo an opportunity for discretion is perhaps too much to ask.